FORWARD LOOKING STATEMENTS

Certain statements discussed in Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) and elsewhere in this Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concerning management's expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements discussed or implied by such forward-looking statements. Such risks, uncertainties and other important factors are described in Items 1A (Risk Factors) and 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of the Company's Form 10-K for the fiscal year ended May 31, 2009 and in Item 1A of Part II hereunder. The words "estimate," "project," "intend," "believe," "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements speak only as of the date of the document in which they are made. The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which the forward-looking statement is based.

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K as filed on September 14, 2009 and in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. All figures are in United States dollars, except as otherwise noted.

OVERVIEW

We are a provider of services and web-based software applications for Human Capital Management ("HCM"). HCM is the process by which companies recruit, train, compensate, evaluate performance, motivate, develop and retain their employees. We offer software and services that address the needs of companies to more effectively manage their HCM functions. We believe that our broad array of HCM solutions provide a "one-stop-shopping" approach for our clients' human resource needs and is more efficient and effective than traditional methods of human resource management.

Our business changed beginning in fiscal 2002. During fiscal 2002, we completed the acquisitions of Paula Allen Holdings, OMNIpartners, 6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine. During fiscal 2003, we completed the acquisitions of Icarian, PureCarbon and Xylo. During fiscal 2004, we completed the acquisitions of Perform, Peopleview and Kadiri. During fiscal 2005, we completed the acquisitions of Peoplebonus, Bravanta, HRSoft and ProAct. During fiscal 2006, we acquired Exxceed, Inc. These acquisitions have enabled us to expand and enhance our HCM software, increase our service offerings and increase our revenue streams. Subsequent to the acquisitions, we have concentrated on integrating the acquired entities and technologies, expanding the reach of the existing business and identifying other potential acquisition targets. When we complete an acquisition, we combine the business of the acquired entity into the Company's existing operations and expect that this will significantly reduce the administrative expenses associated with the business prior to the acquisition. The acquired business is not maintained as a standalone business operation. Therefore, we do not separately account for the acquired business, including its profitability. Rather, it is included in one of our two distinct business segments and is evaluated as part of the entire segment.

Over the past three years, we have expended significant resources on further integration of the acquired software applications. We have enhanced product functionality, user interface and reporting capabilities. We have further integrated many of the talent management solutions and provide a portal based platform for our customers who may elect to contract for a single solution or multiple applications.

In the last half of fiscal 2008, we initiated objectives that were a part of a strategy to align expenses with revenues of the business. Our overall strategic objective is still to be the premier provider of talent management solutions in the HCM space. We completed our development of our seamless integration between our core applications of Compensation, Performance, and Development. We are capitalizing on the sales and marketing expenditures and continue to maintain momentum of selling to new customers and retaining existing customers. We believe that sound execution of these initiatives will result in revenue growth and the ability to take advantage of the scalable nature of our business model.

We have two distinct operating segments, which are the Enterprise Workforce Services and Career Networks segments.

Enterprise Workforce Services

The Enterprise Workforce Services segment primarily consists of HCM software, professional services and additional products sold as part of rewards programs. Specifically, our Enterprise Workforce segment offers a complete suite of on-demand HCM software solutions, which address performance, compensation, development, recruitment, benefits and rewards. Workstream provides on-demand compensation, performance and talent management solutions and services that help companies manage the entire employee lifecycle - from recruitment to retirement. We offer software and services that focus on talent management and address the needs of companies to more effectively manage their Human Capital Management (HCM) functions. Talent Management is the process by which companies recruit, train, evaluate, motivate, develop and retain their employees. We believe that our integrated TalentCenter Solution Suite, which brings together our entire modular stand-alone applications on a common platform, is more efficient and effective than traditional methods of human resource management. Access to our TalentCenter Solution Suite is offered on a monthly subscription basis under our web-based Software-as-a-Service (SaaS) delivery model designed to help companies build high performing workforces, while controlling costs.

Career Networks

The Career Networks segment consists of career transition and applicant sourcing services.

Career Transition Services
Our career transition services provide job search services for displaced employees. We focus on creating professional career marketing materials that displaced employees need in order to immediately begin their new job campaign. This package includes a professionally written résumé, broadcast letter, custom cover letter and references. This assistance is provided to thousands of job seekers each year in the areas of information technology, engineering, finance and marketing.

Applicant Sourcing
6FigureJobs.com, Inc., is an online applicant-sourcing portal where job seeking candidates and companies that are actively hiring and filling positions can interact. The site provides content appropriate for senior executives, directors and other managers, as well as containing job postings that meet their qualifications. We employ screening to create this exclusive community of job seekers. On the candidate side, each job seeker is hand reviewed, to ensure they have recent total compensation of $100,000 per annum, before his or her resume is allowed to reside in the site's candidate database. On the recruiting side, all job openings must have a minimum aggregate compensation of $100,000. We generate revenue through 6FigureJobs on a subscription basis from employers and recruiters that access our database of job seekers and use our tools to post, track and manage job openings. We also generate revenue by charging companies that advertise on our 6FigureJobs website, which includes charging certain advertisers a fee based on the number of leads delivered or on a cost per lead basis. Launched in early calendar 2009, executives who wish to access additional jobs, or give their resume and profile more exposure than free membership, may subscribe to a premium service for a small monthly fee.

KEY PERFORMANCE INDICATORS

To monitor our results of operations and financial condition, we review key financial information including net revenues, gross profit, operating income and cash flow from operations. We have deployed numerous analytical dashboards across our business to assist in evaluating current performance against established metrics, budgets and business objectives on an ongoing basis. We continue to seek methods to more efficiently monitor and manage our business performance.

The following table summarizes the key performance indicators that we consider to be material in managing our business, in thousands (except percentages):

                                           Three Months Ended                                            Three Months Ended
                                            August 31, 2009                                               August 31, 2008
                        Enterprise                                                   Enterprise
                         Workforce       Career                          % of         Workforce        Career                           % of
                         Services       Networks         Total         Revenue        Services        Networks          Total         Revenue
Software                $ 1,502,211     $       -     $ 1,502,211             36 %   $ 1,791,457     $         -     $ 1,791,457             32 %
Professional services       234,338             -         234,338              6 %       721,971               -         721,971             13 %
Rewards                   1,527,930             -       1,527,930             36 %     1,518,915               -       1,518,915             27 %
Career services                   -       947,266         947,266             22 %             -       1,520,544       1,520,544             28 %
Revenue, net              3,264,479       947,266       4,211,745            100 %     4,032,343       1,520,544       5,552,887            100 %

Cost of revenues          1,230,713        58,975       1,289,688             31 %     1,495,088         107,382       1,602,470             29 %
Gross profit              2,033,766       888,291       2,922,057                      2,537,255       1,413,162       3,950,417
                                 62 %          94 %            69 %                           63 %            93 %            71 %




                                                                         Three Months Ended
                                                                August 31, 2009       August 31, 2008
Net loss, per GAAP                                             $        (359,882 )   $      (2,051,582 )
Interest income and expense, net                                         514,075                (3,590 )
Income tax expense                                                           289                33,479
Amortization and depreciation                                            281,777               480,774
Stock related compensation                                                35,155                93,687
Change in fair value of warrants and derivative                         (423,467 )                   -
Other income and expense, net                                              1,602               (38,859 )
Merger and acquisition costs                                                   -                16,017
Adjusted EBITDA income (loss)                                  $          49,549     $      (1,470,074 )

Weighted average number of common shares outstanding-basic            56,993,312            52,442,818

Weighted average number of common shares outstanding-diluted          56,993,312            52,442,818

Basic & diluted earnings (loss) per share, per GAAP            $           (0.01 )   $           (0.04 )

Basic & diluted EBITDA earnings (loss) per share               $            0.00     $           (0.03 )

EBITDA and EBITDA per share are non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. EBITDA is commonly defined as earnings before interest, taxes, depreciation and amortization. We believe that EBITDA provides useful information to investors as it excludes transactions not related to the core cash operating business activities including non-cash transactions. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash operations. All companies do not calculate EBITDA in the same manner, and EBITDA as presented by Workstream may not be comparable to EBITDA presented by other companies. Workstream defines EBITDA as earnings or loss from continuing operations before interest, taxes, depreciation and amortization, other income and expense, including effects of foreign currency gains or losses, non-cash stock related compensation, gain or loss on asset disposals or impairment, merger and acquisition costs, and non-recurring goodwill impairment, if applicable.

RESULTS OF OPERATIONS

The following table sets forth the unaudited consolidated statements of
operations data for the periods indicated. Period-to-period comparisons of our
financial results may not necessarily be an indication of future performance.

                                             Three Months Ended
                                    August 31, 2009       August 31, 2008        $ Change         % Change
Revenues:
Software                           $       1,502,211     $       1,791,457     $   (289,246 )            -16 %
Professional services                        234,338               721,971         (487,633 )            -68 %
Rewards                                    1,527,930             1,518,915            9,015                1 %
Career networks                              947,266             1,520,544         (573,278 )            -38 %
Revenues, net                              4,211,745             5,552,887       (1,341,142 )            -24 %

Cost of revenues                           1,289,688             1,602,470         (312,782 )            -20 %

Gross profit                               2,922,057             3,950,417       (1,028,360 )            -26 %
                                                  69 %                  71 %
Operating expenses:
Selling and marketing                        456,668             1,302,607         (845,939 )            -65 %
General and administrative                 2,021,856             2,925,486         (903,630 )            -31 %
Research and development                     429,139             1,302,102         (872,963 )            -67 %
Amortization and depreciation                281,777               480,774         (198,997 )            -41 %
Total operating expenses                   3,189,440             6,010,969       (2,821,529 )            -47 %

Operating loss                              (267,383 )          (2,060,552 )      1,793,169              -87 %

Other income (expense):
Interest income and expense, net            (514,075 )               3,590         (517,665 )         -14420 %
Change in fair value of warrants
and derivative                               423,467                     -          423,467              100 %
Other income and expense, net                 (1,602 )              38,859          (40,461 )           -104 %
Other income (expense)                       (92,210 )              42,449         (134,659 )           -317 %

Loss before income tax expense              (359,593 )          (2,018,103 )      1,658,510              -82 %

Income tax expense                              (289 )             (33,479 )         33,190              -99 %

NET LOSS                           $        (359,882 )   $      (2,051,582 )   $  1,691,700              -82 %

At the end of fiscal 2008 and the first half of fiscal 2009, management restructured the entire Company and decreased its employee base by 35% and reduced its usage of outside consultants as part of its overall plan to reduce costs to better align them with the Company's current revenues. Therefore, fiscal 2010 expenses for consulting fees and employment related expenses such as wages, commissions, bonuses, payroll taxes and health benefits were and are expected to be sharply lower than fiscal 2009 expenses, especially in Q1 and Q2.

Revenues

Software revenue is comprised of hosting, license and maintenance fees. Software revenue decreased during the three months ended August 31, 2009 (Q1 FY2010) compared to the three months ended August 31, 2008 (Q1 FY2009) primarily due to lower subscriptions as a result of us discontinuing support on old software versions.
Professional services revenues decreased in Q1 FY2010 due to less consulting for existing customer upgrades or specialization work and no new customers in Q1 FY2010 compared to Q1 FY2009.

Rewards revenues remained consistent between the periods.

Career Networks revenues decreased in Q1 FY2010 primarily due to less employer and recruiter advertising and economic conditions that negatively affected deals in the recruiting and career transition services segment of the business along with less availability of financing for its customers. Additionally, we spent less on marketing and advertising and as a result received less leads on which to convert to revenues in Q1 FY2010. We have implemented a more targeted approach and alternative financing terms for our career transition clients and as a result believe that the Q2 FY2010 revenues will begin to improve over Q1.

Cost of Revenues and Gross Profit

Software and Professional Services cost of revenues decreased in amount and as a percentage of sales in Q1 FY2010 primarily as a result of reductions in spending by management to control costs. As a result gross profit improved to 92% in Q1 FY2010 compared to 89% in Q1 FY2009.

Rewards cost of revenues decreased in amount and as a percentage of sales during Q1 FY2010 resulting in an improved gross profit by four percentage points from approximately 25% in Q1 FY2009 to 29% in Q1 FY2010. Gross profit on our rewards business is driven primarily by the mix of products redeemed by the customers and results typically range between 20%-30%.

Career Networks cost of revenues decreased in amount in Q1 FY2010 due to the reduction in revenue levels, but gross profit improved slightly to 94% in Q1 FY2010 compared to 93% in Q1 FY2009.

Selling and Marketing Expense

Consulting and employment related expenses declined in Q1 FY2010 by approximately $640,000 compared to Q1 FY2009 as a result of the restructuring. The additional decrease was due primarily to less trade shows, marketing and advertising programs in Q1 FY2010.

General and Administrative Expense

Consulting and employment related expenses declined in Q1 FY2010 by approximately $456,000 compared to Q1 FY2009 as a result of the restructuring. Non-cash stock compensation expense decreased by approximately $59,000 due to less options outstanding. Additionally, we reduced our space occupancy costs and insurance costs approximately $115,000 by changing or eliminating office space in three locations in Q1 FY2010 compared to Q1 FY2009. Telephone, travel and other administrative expenses also declined due to fewer employees and due to the cancellation and consolidation of contracts in Q1 FY2010.

Research and Development Expense

Consulting and employment related expenses declined in Q1 FY2010 by approximately $735,000 compared to Q1 FY2009 as a result of the restructuring. Additionally, we reduced our space occupancy costs and insurance costs approximately $99,000 by changing or eliminating office space in three locations in Q1 FY2010 compared to Q1 FY2009.

Amortization and Depreciation Expense

Amortization expense decreased by nearly $118,000 in the Q1 FY2010 compared to Q1 FY2009 due to certain acquired intangible assets becoming fully amortized in prior years. Without additional business acquisitions, we are not expecting to incur any additional amortization costs during fiscal 2010. Therefore, fiscal 2010 expense will be significantly less than fiscal 2009. Depreciation expense also decreased by approximately $81,000 due to many of our fixed assets becoming fully depreciated.

Interest Income and Expense, Net

On August 29, 2008, we entered into an exchange agreement that provided for the exchange of $19,000,000 Special Warrants and Additional Warrants indexed to 3,800,000 shares of common stock, issued August 3, 2007 ("Old Warrants"), for $19,147,191 in Face Value of Senior Secured Notes (collectively, the "Notes") and newly issued warrants indexed to 3,800,000 shares of common stock ("New Warrants") (the "Exchange Transaction"). Financing costs of $147,191 incurred by the holders of the Notes ("Holders") are included in the face value of the Notes. Interest on the Notes accrues at an annual rate of 7% until August 29, 2009 and then 12% per year thereafter. The Notes and the embedded put derivative were valued in accordance with FAS No. 157 using multiple, probability-weighted cash flow outcomes at credit-risk adjusted market rates. The fair value of the Notes is being accreted to the Face Value including accrued interest of $22,835,685 until August 29, 2010 through interest expense using the effective interest method. Interest expense on the Notes was $509,151 during Q1 FY2010.

We also incurred an additional net interest expense of $7,774 during Q1 FY2010 compared to net interest income of $3,590 during Q1 FY2009. Net interest expense relates primarily to interest paid on capital leases and other financing transactions net of any interest income earned during the periods.

Change in Fair Value of Warrants and Derivative

The Notes also contain a contingent put reflected in the contractual rights of default. Upon the occurrence of an event of default, as defined in the Notes, a Holder may require us to redeem all or a portion of such Holder's Note at a price equal to 110% of the sum of the principal amount of the Note, accrued and unpaid interest and late fees, if any, to be redeemed. Under FAS No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities," the risks of equity are inconsistent with the risks of the debt host and, therefore, embedded put derivatives such as these require bifurcation and separate classification at fair value. The ($27,333) change in the fair value of the embedded put derivative from $493,693 on May 31, 2009 to $521,026 on August 31, 2009 is recorded as an expense in the Statements of Operations and Comprehensive Loss during Q1 FY2010.

On June 1, 2009, the Company adopted EITF 07-05 which required it to begin accounting for the New Warrants as a liability due primarily to the reset provisions of the warrant in the event of lower priced financing transactions. Therefore, they were reclassified out of equity to a liability classification as of June 1, 2009 via a cumulative effect adjustment (see Warrant Liability under Note 1). The $450,800 change in the fair value of the New Warrants from $876,400 on June 1, 2009 to $425,600 on August 31, 2009 is recorded as income in the Statements of Operations and Comprehensive Loss during Q1 FY2010. Therefore, the net fair value change of all instruments during Q1 FY2010 was recorded as income of $423,467.

LIQUIDITY AND CAPITAL RESOURCES

As of August 31, 2009, we have approximately $1,068,000 in cash and cash equivalents. Working capital, which represents current assets less current liabilities, was negative $24.9 million. This is primarily the result of the fair value of our senior secured notes payable (the "Notes") and a related embedded put derivative on the transaction showing as current as a result of our default on the Notes on May 22, 2009 due to the Company's suspension of trading on the NASDAQ Stock Market as a result of its stockholders deficit. The suspension constituted an event of default under the Notes and thereby entitled each Holder of the Notes to require the Company to redeem all or a portion of the Holder's Note at a price equal to 110% of the sum of the principal amount of the Note, accrued and unpaid interest and late fees, if any. Additionally, as a result of the event of default, the interest rate under each Note was increased by 5% in addition to the contractual rate of interest due.

In August 2009, we signed a term sheet with the Holders, whereby the Holders agreed to restructure the Notes. The term sheet provides that the Holders would exchange the Notes and the accrued interest thereon (approximately $20.7 million as of August 31, 2009) into $9.5 million of new senior secured notes with the balance as convertible notes. The proposed new notes would accrue interest at a rate of 9.5% per annum and have a maturity date of July 31, 2012. The Company and the Holders are negotiating the final terms of the refinancing documents and expect to close the transaction during the Company's second fiscal quarter ending November 30, 2009.

Our ability to continue as a going concern depends primarily upon the successful refinancing or modification of our Notes with the existing Holders and other parties as well as our ability to generate positive cash flows from operations. There can be no assurance that the Company will be successful in its negotiations or that the terms of any such refinancing or conversions will not result in the issuance, or potential issuance, of a significant amount of equity securities that will cause substantial dilution to the Company's stockholders. If the Company is not successful in refinancing the Notes or in otherwise entering into a financing, sale, or business transaction that infuses sufficient cash resources into the Company in the near future, any collection actions by the Holders could have a material adverse affect on the liquidity and financial condition of the Company and its ability to secure additional financing and continue as a going concern.

Due to significant reductions in operating expenses in the fourth quarter of fiscal 2008 and throughout fiscal 2009, management believes the current liquidity will be sufficient to meet its anticipated working capital and capital expenditure requirements upon the refinancing of the Notes. The current operating loss is the result of current economic conditions and is a reflection of the overall health of the economy as a whole. As it relates to the Career Networks segment of the business, management believes that the career transition services will gain strength with new programs implemented at the end of the first quarter of fiscal 2010. Based on an analysis of our current contracts, forecasted new business, our current backlog and current expense level, management believes the Company will meet its cash flow needs for fiscal 2010 . . .